On September 30, 2005, fund manager Larry Sarbit appeared on ROB-TV to
discuss, in part, that he felt he was being targeted by an affiliate
of his former employer. Berkshire, an affiliate of AIC Group of Funds,
reportedly overhauled its product approval process, meaning
Berkshire's advisors cannot sell Sarbit's new fund. Might its new
rules be targeting Sarbit? More importantly, do its tighter criteria
make sense?

The new criteria

According to a recent memo, product sponsors wishing to have access to
Berkshire's network of financial advisors (through which to sell its
products) must have at least $200 million in assets under management
and an operating history of at least five years.

Sarbit, having left AIC in April 2005 to launch his new firm
(officially in September) sees this new set of criteria as directly
targeting his firm. Indeed, many (including yours truly) predicted
that a string of redemptions would flow out of AIC American Focused
and into whatever new firm or fund Sarbit would set up. So, it's not
out of the realm of possibilities that AIC wants to do all it can to
stem redemptions from one of its biggest funds - which is what makes
the timing of the new rules a little suspicious.

Good reasons for tightening the rules

But nor is it surprising that, after the blow up of popular products
like Portus (a hedge fund) and Crocus (a Manitoba labour fund),
dealers across the country are (and should be) re-evaluating how they
decide what their advisors can sell. Berkshire maintains that this is
the driving force behind the changes, and surely that's at least a
part of it. Indeed, we're told that Berkshire has undertaken a review
of all existing relationships with providers of products that are not
sold by prospectus (and hired additional resources to do so).

And Berkshire is not the only firm to tighten up its criteria. It's
not uncommon for larger dealers to require a product sponsor to have
at least $500 million in assets under management prior to signing a
distribution agreement. There are two possible reasons for this. One
is to make sure a company is big enough to be economically viable. The
other is, for larger firms, to ensure that a company has a certain
level of capacity to handle the flow of client money into its
products.

Can't sell its own funds

The next question is: Does such criteria have merit? There's nothing
inherently wrong with it. There are good reasons to require a certain
level of operating history and size. But looking at Berkshire's new
criteria brings up a couple of interesting questions.

First, if Trimark founder Bob Krembil re-entered the mutual fund
business and launched his own fund; would companies like Berkshire
flatly refuse him the "shelf space"? After all, it would be a new
company with little in assets, so strictly applying the 5 years and
$200 million filters would result in a polite "no thank you".

Second, would Adères Portfolio Management Ltd. have been able to
sell its products at Berkshire had they applied today's criteria back
in 1999? This seems like an odd question until you recall that
Adères was a new fund company in 1999 with only a nominal amount of
assets under management. (It's also where Sarbit landed after leaving
Investors Group to manage Adères Focused American - later merged
into AIC American Focused.)

Adères was a separate company, but owned by Berkshire. Turning back
time and strictly applying its criteria to Adères would have
prohibited Berkshire from selling its own funds.

People, not names, should count most

A business and its reputation are nothing more than the people behind
it. Larry Sarbit is obviously a known entity at AIC and Berkshire. Is
there a valid reason they don't want to sell his fund? Perhaps, but
we'll probably never know for sure. In my opinion, a new company
should not be treated as completely new if it's backed by people with
a sound track record in both money management and operations.

Otherwise, strictly applying such criteria would preclude any new firm
to get off the ground.

Plus, since many money managers often enjoy their greatest investment
success with a relatively smaller asset base (when they have the
greatest flexibility) waiting for a firm to get bigger may result in
missing a fund's greatest years.

For better or worse, this is the tradeoff that more conservative firms
- and their advisors - must accept in such situations. And dealers,
understandably, are likely erring on the side of caution in the face
of increased regulatory responsibilities.

So, I understand the criteria and its use but it's not the way I would
go about screening products. If dealers want to play it safe, why not
apply more common sense rules like "we won't approve a product
sponsored by a firm that doesn't have an independent trustee"?

If compliance and the safety of client money are the real concerns, it
seems silly to simply use criteria that have no relationship to
governance and compliance. Why not zero in directly on the areas of
concern?

Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in
Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and
provides independent investment research to financial advisors. He can be
reached at dha@danhallett.com

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